Securing fair treatment between the ‘euro-ins’ and ‘euro-outs’

Roger Liddle
-
06 November 2015

Strengthening safeguards to ensure fair treatment of countries within
and outside the eurozone has become a key British renegotiation
objective. But what threat actually exits within the current rules?

Strengthened binding safeguards of fair treatment in the single market between those within the eurozone and those outside it have become crucial British objectives in the renegotiation. But what is the British government driving at that does not already exist? Non-discrimination within the single market is a core principle of the EU treaties. Rulings of the European Court of Justice (ECJ) have consistently upheld that core principle. A good example is their recent overturning of a European Central Bank (ECB) attempt to insist that clearing houses dealing in euro-denominated securities are physically based within the eurozone. In this case, the British government was of course pleased at what they saw as a victory for the City against the ambitions of the eurozone.

How far that praise will extend for the ECJ’s consistency in upholding the principle of non-discrimination remains to be seen, for it is against that same principle of non-discrimination that the ECJ will judge member state attempts to discourage freedom of movement by denying benefits to EU migrants to which their own citizens are entitled. The British government is caught in a cleft stick: it aims to strengthen the treaty principles of non-discrimination in one policy domain and weaken them in another.

The spectre that the British government (and particularly Treasury officials) appear to fear is that, as the eurozone integrates, it will act more as a bloc. If the eurozone votes as one, it can muster a qualified majority in the council of ministers; that inbuilt majority could then impose single market rules that are detrimental to UK interests. This is a particular Treasury fear in relation to the City of London, where financial services regulation is subject to qualified majority voting, but it also potentially applies to other policy areas and sectors. Hence, the government argues, the need for new ‘safeguards’.

The ‘problem’ of course is of Britain’s own making. Britain has chosen not to join the euro. In the long road to Maastricht, where the project for a single currency first became specified in a European treaty, monetary union was envisaged as ultimately a project for the whole EU. Britain and Denmark won a permanent right of opt-out, but all other member states were treaty-bound in theory to participate in the single currency when they satisfied the convergence criteria. Few thought then in terms of a permanent division between ‘euro-ins’ and ‘euro-outs’. Britain now appears to be asking for a clearer and more specific acknowledgement in the treaties that the division between ‘euro-in’ and ‘euro-outs’ is a permanent one, and that EU decision-making should formally accommodate the interests of the permanent ‘outs’ as well as the committed ‘ins’ in order to secure a ‘level playing field’ in the single market.

A basic difficulty David Cameron and George Osborne face is that while they frequently assert that Britain will never join the euro (and British public opinion at present overwhelmingly agrees), most of our ‘euro-out’ partners are reluctant to say ‘never’. Most ‘euro-outs’ still see themselves as eventual members of the single currency someday, or at least want to keep the option open, even though the euro crisis has warned everyone of the risks of forced convergence on an arbitrary political timetable. This poses an obvious political conundrum which divides the present ‘euro-outs’. Britain wants its status outside the single currency to be more clearly recognised in treaty form, with stronger safeguards against discrimination by the ‘euro-ins’. Other member states presently outside the euro are not so keen on their status as ‘outs’ being recognised as permanent, precisely because their fear is a reverse one: that the ‘ins’ may try to keep them in a state of what they see as second-class membership indefinitely, even when they aim in time to join as full members of the euro club. In Poland, for example, the question of eventual membership of the euro is highly contentious between the moderate centre and its more rightwing nationalist opponents.

This demand for a special status from the UK sits alongside a fact of life British policymakers find difficult publicly to acknowledge: the high degree of economic integration between the British economy and the eurozone. The City of London is the financial centre of the eurozone, handling roughly two thirds of all the eurozone’s financial services business. Over 40 per cent of all British exports go to the eurozone – nearly half our goods exports, and over a third of services, including financial services. The vast majority of larger British-based businesses operate across the single market’s borders and think in terms of Europe as their home market. As a result, Britain has not escaped the reality of the euro’s existence or its consequences, by being outside it. Because it matters so much to UK economic prospects, the sustainability and prosperity of the eurozone is a core British national interest. In 2010, George Osborne concluded that eurozone break up would be a catastrophe for the UK. In the recent Greek crisis, he has consistently urged our eurozone partners to do all they can to keep Greece inside the euro.

What’s more, the British government has acknowledged that, in Brussels language, economic and monetary union is ‘incomplete’. The single currency came into being with a single monetary policy but little more. In Osborne’s view, greater fiscal and economic integration within the eurozone has an inexorable logic. The British government is therefore caught on the horns of a dilemma. It wants the eurozone to act more effectively together as a bloc, but at the same time it fears that the consequences of greater eurozone integration could be actions that either consciously or unconsciously discriminate against British interests in the single market.

Britain’s dilemma became a real one in 2012, with the creation of the banking union. Two years earlier, as a consequence of the 2008 banking crisis, the British had been forced to make a fundamental (but largely unnoticed) change of policy on financial regulation. Whereas, for a decade or more before, the UK had insisted on minimal EU interference as financial markets were liberalised, it now recognised the need for stronger EU-wide regulation. The change of policy was first announced by Alastair Darling as chancellor of the exchequer, but swiftly confirmed, after the 2010 general election, by his successor George Osborne. At the same time Britain aimed to minimise the role of the new EU regulatory bodies by keeping EU directives “principles-based”. The new EU regulatory bodies were positioned as having a coordinating rather than directing role and as a result, relatively under-resourced. It was imagined that national bodies, especially those based in London, would continue largely in the driving seat as the main source of expertise and clout. Then in 2012, the mighty ECB took over prime responsibility for eurozone banking supervision.

When the eurozone banking union was established, the UK decided not to join. This was despite an offer by our EU partners that non-euro members could participate, but the British government decided (for reasons that have never been thoroughly scrutinised) not to take it up. However, the creation of a single supervisor and effective rulemaker in the ECB clearly had implications for the regulation of the single market in financial services across the whole EU. Although the ECB did not have a vote in the council of ministers, if all eurozone members acted on its advice it would command a qualified majority. As a result, as a concession to UK sensitivities, special voting rules were agreed for the European Banking Authority, mandating a double majority requirement for ‘euro-ins’ and ‘euro-outs’. But these rules were explicitly classed as temporary: they would cease to apply when there were four or fewer non-euro members. Nor do they apply to primary financial services legislation which remains a matter determined by qualified majority voting in the Ecofin council of ministers. In theory a bloc or ‘caucus’ (in the more unfortunate pejorative language sometimes used) of eurozone member states could impose new laws on the City of London, which the UK would not be able to stop.

In the UK government’s eyes, to raise these concerns is perfectly legitimate. However, it has led our eurozone partners to believe that when the British talk of new ‘safeguards’ they are in effect asking for special protection for the City against the application of qualified majority voting. During the December 2011 European council discussion of the fiscal treaty, David Cameron tabled a last-minute set of demands which other leaders interpreted as an attempt to secure a unanimity rule on issues concerning the City. Cameron failed and Britain did not sign the fiscal treaty, but his move caused anger and consternation.

The British know that a new requirement for unanimity in the council on financial services matters is a ‘red line’ for our partners. How can it be democratically legitimate, if the eurozone faces a crisis, on what are fundamental questions of economic policy that are at the core of politics, for the consent of non-euro members to be obtained before the eurozone can act in its own public interest! The UK Treasury is in the wrong place on this issue. For example, they have objected to the fact that our partners made use of funds from the European Financial Stability Mechanism, by qualified-majority-voting decision, to assist Greece in the July 2015 Greek crisis, despite earlier assurances that they would not be used in aid of the euro rescue. The purpose was to obtain the emergency funding necessary to enable Greece to pay its outstanding debts to the International Monetary Fund and ECB, which would otherwise have resulted in a Greek default. Given the gravity of the Greek crisis, the consequences of Grexit for the whole European economy, and the fact that Britain was vocal in its demands that Grexit be avoided, Treasury complaints ring hollow: they are a denial of the reality of politics.

A veto right for London on City questions would also breach a fundamental principle of the EU. If every member state demanded special protection for the sector which was most crucial to its economy, there would be no single market. Despite claims sometimes made by British Eurosceptics, the French have no veto over agriculture: decisions on the future of the common agricultural policy are made by qualified majority. Why should London’s financial services enjoy a special favour they do not?

Finding a political solution to these questions has not been helped by visceral suspicions of the City of London in continental political circles. ‘Bankers’ are blamed for the scale of the 2008 crisis and the UK government is held responsible for the fact proper financial regulation was not in place at EU level to prevent it. There are elements of absurdity in this. It was not just bankers in the City of London who committed huge mistakes; they did so across Europe. And there was no intellectual or policy consensus that either anticipated the scale of the crisis or conceptualised regulatory reforms that might have averted it. Nonetheless, the emotional anger is only slowly fading.

Is there a way through this impasse? The British government denies that their aim is to secure unanimity on City matters. But if not, what are the British after? The truth is that the City and eurozone are bound up with each other so inextricably that the only way of dealing with inevitable regulatory tensions is through consistent engagement and the building of long-term trust. Codifying processes may be of value here:

• Close working relations between the ECB and Bank of England are the sine qua non for non-discriminatory behaviour.
• Procedural mechanisms mandating non-eurozone observer participation in all meetings could help.
• A provision for an ‘emergency brake’ where a member state that spots an issue that they see as vital to their national interest can have the matter discussed at the European council, could be a last resort.

There is a bigger responsibility on the City as well to ensure that the political class across Europe understand how its activities contribute to jobs and growth. It is significant that the proposals to introduce a financial transactions tax by France and Germany appear to have been much watered down as soon as businesses in those countries realised how much such a tax might damage their ability to raise capital.

By a wide majority, the City of London wants Britain to stay part of the EU. Being outside will for them be a far worse alternative, with many banks and financial institutions already warning that they would reduce their presence in the UK. What matters to the City above all is having a British government that is committed to the success of the City within the EU’s single market.

Is it only the City that needs special single-market protections against potential abuse of eurozone power? Following the Greek debacle of July 2015, the debate about the necessity for further eurozone integration is once again firmly on the table. François Hollande is attempting to give new momentum to old French ideas about a ‘gouvernement économique’: a continental political/fiscal authority at eurozone level to match the monetary independence of the ECB. Wolfgang Schäuble, the German finance minister, has reiterated his support for the creation of a eurozone finance ministry. Sigmar Gabriel, the Social Democrat vice-chancellor of Germany, and Emmanuel Macron, the reforming French economy minister, have tabled a set of proposals for more convergent economic policies within the eurozone. Eurosceptics may see in these developments a threat to UK interests, though there is very little specific in these ideas that could as yet be so defined.

However, from the perspective of the British renegotiation, assuming there is no further dramatic instability in the eurozone, none of this speculation will come to fruition in terms of treaty change until after the French and German elections in 2017. Until then, much as British policymakers may wish differently, it is impossible to anticipate what a two-tier Europe would look like, how this might in theory have an adverse effect on Britain, and what ‘safeguards’ against those adverse effects might be possible.

What might be achievable would be for the European council to agree a declaration of principles about the future shape of a two tier Europe, and Britain’s place within it. Such a declaration could address the reality of an increasingly two-tier EU, with a more closely integrated inner-core eurozone and the existence of a group of member states outside, for whom membership is not in prospect for the foreseeable future. Such a declaration of principles would nonetheless immediately raise a number of difficult, if not intractable, issues that would have to be resolved if a two-tier Europe were to be formalised. For example:

• How legitimate is it for a commission and parliament representing all 28 member states to rule on policies that only concern the 18 member countries of the eurozone?
• What would be the basis of representation on eurozone matters: population, GDP, potential financial liability?
• Would representatives of national parliaments sit alongside MEPs in decision-making on eurozone economic and fiscal policy?
• Would a double-majority system of eurozone ‘ins’ and ‘outs’ operate in the European parliament and council of ministers – and on what issues?
• For which EU appointments could candidates from non-euro member states still be eligible?
• If British MEPs could no longer vote on eurozone matters, how would these issues be defined and by what procedure, and would that in reality weaken UK influence over eurozone policies?
• What would happen to voting arrangements on other issues where member states have opt-outs – for example on Schengen, asylum rules and European defence cooperation.

These questions are the EU equivalent of the West Lothian question – and given its known intractability, it seems heavily against the odds that they will be resolved in David Cameron’s timetable for renegotiation. An informal two-tier Europe is what Britain has in practice opted for by its self-exclusion from the euro. This may be for good reasons, but there are limits to how much, in reality, Britain can secure the benefits of being both an insider and outsider at one and the same time. This was the harsh lesson Britain learned from the treaty of Rome onwards and led to Harold Macmillan, Harold Wilson and Edward Heath pursuing the goal of full British membership.

Britain is raising large issues but in its renegotiation is likely to achieve small results beyond strengthened treaty guarantees against non-discrimination.

Add comment

Name

Enter the code shown:

The Policy Network Observatory promotes critical debate and reflection on progressive politics. It is centre-left orientated but determinedly challenges social democracy. It is pro-European but restlessly questions EU institutions and practices.